A Little Light at the End of the Economy Tunnel…But Is it Enough?

recession analysisMake no mistake about it; the economic situation in the United States is improving, but not at the pace I would like to see.

The Federal Reserve came out and made a downward revision in its GDP estimate for both 2010 and 2011. The Fed predicted high unemployment to continue into 2011.

Without strong jobs creation, I question the ability for strong, sustained economic recovery.

We did see strong first-time jobless claims for the week ending November 20 at an impressive 407,000, down 34,000 from the previous week and at a two-year low. The size of the decline is incredible and totally unexpected, but can it continue in the months ahead?

The improvements in the claims picture are nonetheless encouraging, but watch to see if this continues. Perhaps the major decline in numbers was an aberration or was driven by the extra hiring given Black Friday and the key holiday season upon us. Another few readings near 400,000 will clearly turn some heads, although I doubt it will happen given the continued high unemployment. For a healthy jobs market, the key level to watch for is 400,000 and below.

Also on the plus side, the Thomson Reuters/University of Michigan consumer sentiment came in at a stronger than expected 71.6 in November, the highest since June 2010.

While confidence appears to be improving, I continue to see fragility towards spending on non-essential goods and services that are not required for everyday living. That means expensive dining, new furniture and appliances, and new vehicles.

The uncertainty was clearly reflected in the weak Durable Goods reading, which was a disappointment and in my view worrisome. The Durable Goods Orders reading for October saw a disappointing decline of 3.3%, much worse than the negative 0.3% estimate polled by Briefing and down from the upwardly revised five percent in September. Excluding transportation, Durable Goods fell 2.7% versus the estimate calling for a rise of 0.4%.

I’m disappointed with the Durable Goods results, which in my view continues to indicate weak demand for non-essential goods and services. Again, until we see sustained improvement in jobs and housing, there will likely continue to be problems arising,

Now with Black Friday here, early indications point to higher spending at the cash registers. The key will be the profit margins and whether the selling is driven by heavy discounting and clearances of goods, which is not indicative of a strong retail setting.

Yes, there are some strong sales results. Take for instance the luxury goods stocks, which are continuing to fare well in spite of the economy. I guess the rich are spending again. Tiffany & Co (NYSE/TIF) managed to beat on both third-quarter sales and earnings per share. The high-end jeweler also said it expects a strong holiday season. A strong holiday sales season could drive a Santa Claus Rally extending into the New Year.

Let’s hope stocks are rewarded.